NBFIs' earnings growth in H1 relies on Treasury income, asset quality

Only four non-bank financial institutions (NBFIs) out of the 15 that have published financial reports for January-June this year posted a year-on-year profit growth, driven by a surge in investment income.
IPDC Finance, IDLC Finance, DBH Finance and United Finance stand out in the industry for their consistently good financial performance. Their operating efficiency, low amounts of toxic loans, and higher investment income helped them stay on the growth trajectory even in an adverse business climate.
Of the remaining NBFIs, Bangladesh Finance and National Housing Finance saw their profits plunge 63 per cent and 25 per cent respectively in the six months to June, compared to the same period of the previous year, while the nine other NBFIs stayed in the red mainly for bad loans and widespread scams.
Market analysts said the good performers had reaped handsome profits from investments in government securities while net interest income dropped year-on-year in the first half of the year.
Interest expenses on deposits increased during the time, compared to the same period a year ago, due to the market-based interest rates.
Meanwhile, yields of government securities were high, which could be taken advantage of by companies that managed their finances well. For the past two months, however, the interest rates of T-bonds and bills have been on the decline.
Of the 23 NBFIs listed on the Dhaka Stock Exchange, 15 have so far published financial reports for the first half of this year.
Akramul Alam, head of research at Royal Capital, said the NBFIs whose asset quality is good and which could mobilize funds at relatively lower costs, leveraging their operating efficiency, secured a profit growth.
"As the private sector credit demand remained sluggish, the cash-rich NBFIs parked their funds in government securities as a safe haven, "said Mr Alam.
IPDC Finance's profit soared more than 45 per cent year-on-year to Tk 150 million although its net interest income dropped 22 per cent year-on-year in January-June this year.
However, investment income escalated by almost 159 per cent year-on-year to Tk 565 million during the period, buoyed by better Treasury returns and favourable capital market movements.
"Despite challenges in the macroeconomic environment and rising cost of funds, strategic focus on Treasury efficiency, risk management, and operating efficiency enabled it [the company] to deliver solid results," said Rizwan Dawood Shams, managing director of IPDC Finance in a statement.
The IPDC Finance's loans, leases, and investment portfolio grew by 6.8 per cent in January-June to Tk 84.38 billion. Its investment portfolio expanded 36.4 per cent from December through June, while customer deposits reached Tk 56.65 billion, showing a 9.4 per cent growth over the six months to June.
IDLC Finance also secured an impressive 45 per cent growth in profit year-on-year to Tk 1.08 billion in January-June this year although net interest income plunged 23 per cent year-on-year during the period.
While interest income rose due to the removal of the lending rate cap and the introduction of the market-based interest rate in May last year, interest payment to depositors and lenders also increased simultaneously.
However, IDLC Finance also managed to secure a higher profit in H1 this year, supported by higher investment income from government securities. Its income from investments soared 452 per cent year-on-year to Tk 1.47 billion in the six months through June.
Mr Alam said the net interest income, the core source of income for NBFIs, was not overwhelming, but a significant gain from investments in government securities drove the profit growth of the lender.
DBH Finance, one of the country's leading non-bank financial institutions, with a strong focus on housing finance, reported a profit of Tk 420 million for January-June, reflecting a 3 per cent year-on-year growth.
Its net interest income dropped 12 per cent while investment income soared 45 per cent year-on-year in the six months through June this year.
DBH Finance has always been able to keep operating costs down and mobilize funds at relatively low costs due to its excellent market reputation, which enabled the company to remain competitive in the market.
"Our results reflect our operational strength and customer-first approach," said Nasimul Baten, managing director and CEO of DBH Finance, commenting on the half-yearly performance.
DBH Finance's home loan disbursements increased 11 percent, while its core deposit portfolio grew by 18 per cent in January-June. The non-performing loan (NPL) ratio remained below 1 per cent of the loan portfolio, one of the lowest in the industry.
United Finance's profit grew 6 per cent year-on-year to Tk 32 million in the six months through June this year, as investment income rose 15 per cent year-on-year to Tk 99 million during the time.
Poor performers
Meanwhile, most of the non-bank financial institutions have been struggling with a huge amount of non-performing loans, liquidity crisis, and negative interest margin.
Due to widespread scams in some NBFIs, the volume of bad loans in the industry soared to as high as 35 per cent of the total loans disbursed as of March this year. So, the companies had to keep huge provisions for those loans and investments.
Among the loss-making NBFIs, Phoenix Finance suffered the highest loss of Tk 2.63 billion in January-June this year. However, losses could be reduced by 40 per cent year-on-year through lower provisioning.
Alongside the pile-up of NPLs, asset quality of scam-hit NBFIs has deteriorated drastically leaving a huge impact on the overall sector.
The Bangladesh Bank is tightening its grip on troubled NBFIs and has initiated a large-scale merger plan under the Bank Resolution Ordinance.
It has recently served notices to 20 NBFIs, which are now unable to repay depositors due to widespread irregularities, asking them to explain why their licences should not be revoked.
Of the 20 NBFIs, 14 are listed on the stock exchanges, including scam-hit People's Leasing and Financial Services, International Leasing and Financial Services, FAS Finance, and Bangladesh Industrial Finance Company.
The central bank may merge or liquidate these NBFIs.

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